Oklahoma lawmakers questioned officials with the Commissioners of the Land Office over their $8 million investment in a local company that buys houses in a rent-to-own program for residents who can’t qualify for a mortgage.
The questions came Wednesday as the Legislative Office of Financial Transparency presented its draft findings in an examination of the agency.
Among the recommendations were selling its real estate holdings to put more of a focus on the higher returns from securities investments. The report criticized the Land Office’s recent foray into direct investments, where it acts like a private equity investor.
In December 2021, the land office spent $8 million for a limited partnership investment in Berry-Rock OK. The agency received a $220,000 distribution in the first quarter of 2023. Berry Rock Homes buys houses on behalf of its customers, who then pay rent in a “gap” program until customers build up enough credit to obtain a mortgage.
Sen. Michael Brooks, D-Oklahoma City, said he wondered if the agency had asked the attorney general’s office if it had the authority to make a direct investment like that.
Bennett Abbott, the Land Office’s general counsel, said he researched the legality himself with the help of another agency attorney and two contracted attorneys from a local law firm. Abbott said the investment was modeled after those allowed in the Invest in Oklahoma Act, which is administered by the Oklahoma Department of Commerce.
The Legislative Office of Fiscal Tranparency’s executive director, Mike Jackson, said the Berry-Rock investment would not have qualified under the law, which was passed in 2021 under Senate Bill 922. Berry-Rock was only four months old at the time of the investment, and the law required companies to be in operation at least one year.
In its policy recommendations, the report said the legislature should not allow the land office to make direct investments in companies that were not publicly traded.
“LOFT was unable to obtain any investment performance reports related to this (Berry Rock) investment,” the report said.
Land office benefits education
The land office’s investments total more than $2.3 billion. It provides more than $122 million for education each year in Oklahoma. That money comes from agricultural land leases, mineral royalties and commercial real estate rent. Income from securities investments provides the bulk of yearly income from the trust. It holds 750,000 acres of land across the state, mostly in the western half. Those leases bring in about $22 million of the total income each year.
The land office’s real estate holdings aren’t subject to property taxes, making it less beneficial for some local school districts with a lack of large commercial and industrial businesses.
The land office’s real estate holdings aren’t subject to property taxes, so schools benefit less from those holdings than they would from large commercial or industrial properties in their districts.
Sen. Julia Kirt, D-Oklahoma City, said much of the land office’s commercial property holdings are in Oklahoma City, meaning less tax revenue for the Oklahoma City Public Schools. The land office increased its commercial property holdings in recent years after getting approval from the Legislature.
In another example, officials with the fiscal transparency office said Cimarron County schools were missing out on as much as $1.56 million in additional property tax revenue each year because of the tax-free status on the large holdings of school land in the panhandle. The land office holds one-fifth of the agricultural land in the sprawling county.
“While the property holding may yield a positive impact on CLO’s fund, it has a negative impact on counties, county health departments, career technology centers, and in some instances school districts, through reduced tax revenue,” the report said.
In a written response to the report, agency officials disagreed with that conclusion. They said it was unlikely local tax collections were guaranteed to increase from the sale of public lands. Instead, tax rates for existing landowners might be reduced as new landowners are added to the tax rolls. They also said selling that amount of property without a plan could depress land prices across the state.
State building leases a conflict?
The land office helps manage and provide space to some state agencies through rentals. That can come into conflict since the land office wants the highest possible prices for leases, but state agencies are usually looking for the lowest-cost spaces.
Several lawmakers questioned agency officials over the purchase in June 2020 of the former SandRidge Energy building in downtown Oklahoma City. Its state agency tenants include the Oklahoma State Department of Health and the Oklahoma Tax Commission. But lawmakers noticed its value had fallen since the purchase.
The report criticized the performance of the land office’s commercial real estate holdings. It said commercial real estate holdings increased 190% in the past five years. But rental income has been static and the return on investment has fallen.
“If the Legislature were to direct the CLO to liquidate all real estate holdings, the proceeds of those sales would remain with the trust,” the report said. “The revenue generated from the sale could be converted into securities, which would then generate interest earnings that would be distributed to beneficiaries.”
Oklahoma and 20 other states have similar land offices that manage investments for the benefit of education. Most of them were established west of the Mississippi River as the United States expanded its territory in the 19th century.
Separately, the Oklahoma State Bureau of Investigation last year opened an investigation into the agency over claims by an internal auditor that the land office’s former secretary abused his position. The attorney general’s office has taken over that investigation, which is ongoing.